Freight-In vs Freight-Out: Where Each Hits the P&L

A distributor closes March and reports a gross margin two points lower than February, although prices and purchase costs did not move. The cause sits in one ledger line: a large inbound truckload of stock was paid in March, and the whole carrier bill went straight to cost of goods sold, while most of the units it carried are still on the shelf. In April the margin will look unusually good for the same reason.

Freight-in and freight-out are not two names for one expense. Freight-in is part of what the stock cost, so it reaches profit only as the goods sell. Freight-out is a cost of getting a sale to the customer, so it lands in the period of the sale, in a line chosen by accounting policy. Getting the split right keeps monthly margins honest and inventory values supportable.

• What this guide explains: how one shipment becomes freight-in for the buyer and freight-out for the seller, when each reaches the income statement, and where it appears on a US statement and on an Indian Schedule III statement.
• What it works through: a two-month example in US dollars and Indian rupees with half the stock unsold, journal entries under periodic and perpetual ledgers, and delivery fees billed to customers under ASC 606 and the CGST valuation rule.

One shipment is freight-out for the seller and freight-in for the buyer

The same carrier invoice can carry two labels, depending on whose books you open. When a supplier ships goods to a distributor, the transport leg is inbound for the distributor and outbound for the supplier. Which of the two actually records the carrier charge depends on the sale terms and on who contracted the haulier, not on the carrier or the lane.

Freight-in, sometimes called carriage inwards or transportation-in, is the cost of bringing purchased goods to the place where they will be stored, used or sold. Freight-out, also called carriage outwards or delivery expense, is the cost of moving sold goods from your location to a customer. A manufacturer has both, and so does a distributor; a retailer that only buys may see mostly freight-in until it runs home delivery.

Freight-in classification for a purchased-goods receipt follows ASC 330-10-30-1 and Ind AS 2 paragraph 11, which include transport needed to bring goods to their present location in inventory cost; the receiving entity's inventory ledger should therefore carry inbound carrier charges at 100% of normal cost, net of recoverable tax.

Our freight GL coding guide goes further than this article on the account matrix, accessorial codes and allocation keys an accounts payable team uses every day. This page stays with the concept: what the two terms mean, why they reach the profit and loss account at different times, and how the presentation differs between a US filer and an Indian company.

Shipping terms and freight payment terms decide who books which line

Ownership during transit tells you whether a charge is the buyer's inbound cost or the seller's outbound cost; the freight payment term tells you only who writes the cheque. Mixing the two is the most common reason the same bill is coded differently by two clerks on the same day.

Under FOB shipping point, title and risk usually pass when the goods leave the seller, so transport belongs to the buyer and is freight-in for the buyer. Under FOB destination, the seller owns the goods until delivery, so transport is the seller's freight-out. Incoterms 2020 rules work the same way for risk and cost, though they do not settle title; our FOB versus CIF comparison walks through those cost points for ocean freight.

• FOB shipping point, freight collect: the buyer hires and pays the carrier; the buyer records freight-in, the seller records nothing for transport.
• FOB destination, freight prepaid: the seller hires and pays; the seller records freight-out, the buyer records nothing beyond the goods price.
• FOB shipping point, prepay and add: the seller pays the carrier and adds the charge to its invoice; the buyer still records freight-in, and the seller treats the recharge as part of its sale.
• FOB destination, freight collect: an unusual mix where the buyer pays a carrier for goods it does not yet own; the buyer should seek reimbursement or treat the amount as agreed price.

Freight-in reaches the P&L only when the goods it carried are sold

Freight-in is not a period expense. It joins the carrying amount of the stock and moves to the income statement through cost of goods sold in the period the related revenue is recognised. If half the units are unsold at month-end, half the inbound freight should still be on the balance sheet.

Ind AS 2 paragraph 34 states the rule directly: when inventories are sold, their carrying amount is recognised as an expense in the period in which the related revenue is recognised. Because paragraph 11 puts directly attributable transport into the costs of purchase, the inbound freight inside that carrying amount follows the goods. US GAAP reaches the same result through ASC 330-10-30-1, which measures inventory at the costs of bringing it to its existing condition and location.

Inbound freight timing under Ind AS 2 paragraph 34 and ASC 330 releases capitalised carrier cost to cost of goods sold only in proportion to units sold; a receipt of 2,000 units with $3,000 freight and 1,000 units sold therefore moves $1,500 to the income statement and leaves $1,500 in inventory.

Two exceptions keep freight-in honest. Abnormal amounts, such as an air expedite caused by a planning miss, are excluded from inventory by Ind AS 2 paragraph 16 and ASC 330-10-30-7 and charged in the period incurred. Recoverable taxes on the transporter's bill, such as eligible GST input credit in India, are also excluded by paragraph 11. Our landed cost capitalisation guide sets out a test for abnormal freight and covers duties and port charges.

Periodic and perpetual ledgers record freight-in in different places

A periodic ledger keeps a separate Freight-In account and folds it into cost of goods sold through the year-end inventory count; a perpetual ledger adds the freight to each item's cost when the goods are received. The economics are the same, but the month-end reports look very different.

In a periodic system, purchases and freight-in accumulate in temporary accounts. Cost of goods sold is computed, not posted: beginning inventory plus net purchases plus freight-in equals goods available for sale, and the counted ending inventory, valued including its share of freight, is subtracted. If the ending count is valued at supplier price only, the freight on unsold goods leaks into cost of goods sold.

Periodic system, per period
  Goods available = Opening inventory + Net purchases + Freight-in
  COGS            = Goods available - Closing inventory (valued with its freight share)

Perpetual system, per receipt and per sale
  Landed unit cost  u = (P_supplier * Q_rcv + F_in_normal) / Q_rcv
  Freight to COGS   = (F_in_normal / Q_rcv) * Q_sold
  Freight left in stock = F_in_normal * (1 - Q_sold / Q_rcv)

Where
  P_supplier  = supplier unit price, excluding recoverable tax
  Q_rcv       = units received on the goods receipt
  Q_sold      = units of that receipt sold in the period
  F_in_normal = inbound carrier charges for the receipt, excluding abnormal
                amounts and recoverable GST
Tolerance: the per-unit freight rounding should not exceed $0.01 or Rs 1 per unit

A perpetual ledger posts the freight to an inventory freight clearing account when the carrier bill arrives, then absorbs it into item cost through a landed cost run linked to the goods receipt. Each sale then relieves stock at the landed unit cost, so freight reaches cost of goods sold automatically. The usual weak point is timing: if the carrier bill arrives after the goods have sold, the absorbed amount must go to cost of goods sold, not to stock that no longer exists.

• Periodic entry on the carrier bill: debit Freight-In, debit GST input credit where recoverable, credit Accounts Payable.
• Perpetual entry on the carrier bill: debit Inventory freight clearing, debit GST input credit where recoverable, credit Accounts Payable.
• Perpetual landed cost run: debit Inventory for items still on hand and Cost of goods sold for items already sold, credit Inventory freight clearing.
• Freight-out entry in either system: debit Freight-out or Delivery expense, debit GST input credit where recoverable, credit Accounts Payable.

Freight-out sits above or below gross margin depending on policy

Freight-out never enters inventory once the customer controls the goods, so the only question for a US filer is which line of a function-based income statement carries it. That choice moves reported gross margin, not operating profit.

ASC 606-10-25-18B lets an entity elect to account for shipping and handling performed after the customer obtains control as an activity to fulfil the promise to transfer the good, rather than as a separate service. KPMG's inventory handbook notes that most entities therefore present outbound shipping in cost of sales, and that the SEC staff did not object to entities keeping an earlier, consistently applied presentation in selling, general and administrative expense.

Freight-out presentation for a US company electing ASC 606-10-25-18B treats post-control shipping as fulfilment cost, usually inside cost of sales; moving $1,800 of monthly delivery cost between cost of sales and SG&A on $61,200 of revenue changes gross margin by 2.9 points with operating profit unchanged.

Comparability is the practical issue. Two distributors with identical operations can report gross margins three points apart purely because one carries delivery in cost of sales. When benchmarking, analysts should ask where outbound freight sits before comparing margins, and companies placing significant shipping costs outside cost of sales should disclose the amount and the line. Our freight cost as a percentage of sales guide shows how to build a ratio that survives that difference.

Indian statements of profit and loss have no cost of sales line

An Indian company reporting under Ind AS cannot show a function-wise cost of sales line at all, so the freight-in versus freight-out question becomes "which nature-of-expense line?" rather than "above or below gross margin?". That surprises US parents consolidating Indian subsidiaries.

Ind AS 2 Appendix 1 explains that IAS 2 paragraph 38, which deals with function-wise expense presentation, was deleted because Ind AS 1 requires only nature-wise classification of expenses. Schedule III Division II to the Companies Act, 2013 therefore lists expense lines such as cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits expense, finance costs, depreciation and other expenses. There is no gross profit subtotal on the face of the statement.

The disclosure rule in Part II of Division II matters for logistics-heavy businesses. Note 7(c) of the general instructions requires separate disclosure of any item of income or expenditure exceeding one per cent of revenue from operations or ₹10,00,000, whichever is higher. Freight outward routinely crosses that line for distributors and fast-moving consumer goods companies, so it usually appears as its own row in the other expenses note.

Freight outward disclosure under Schedule III Division II note 7(c) of the Companies Act, 2013 applies when the annual expense exceeds the higher of 1% of revenue from operations and ₹10,00,000; an Indian distributor with ₹58.8 crore revenue must list freight outward once it passes ₹58.8 lakh.

Delivery charges billed to customers: revenue, cost and GST value

When a seller recharges delivery to its customer, the charge is part of what the customer pays for the goods, not a reduction of freight-out. Netting the recharge against the carrier cost understates both revenue and expense and, in India, can understate the value on which GST is charged.

Under US GAAP, a seller that applies the ASC 606-10-25-18B election treats shipping as fulfilment of the promise to transfer goods, so amounts billed for delivery form part of the transaction price for those goods and are reported as revenue. The carrier cost stays in freight-out. The gross presentation also follows from the seller being the party that arranges and controls the delivery service before the goods reach the customer.

In India, section 15(2)(c) of the CGST Act, 2017 includes in the value of supply incidental expenses charged by the supplier to the recipient and any amount charged for anything done by the supplier in respect of the supply at the time of, or before, delivery. Section 2(30) illustrates goods packed and transported with insurance as a composite supply, and section 8(a) taxes a composite supply as its principal supply, here the goods.

• Sales invoice treatment: show the delivery charge on the goods invoice and include it in the taxable value at the goods' rate, not as a separate transport service.
• Revenue line: report the recharge in revenue from operations, with the carrier's bill remaining in freight outward under other expenses.
• Recovery reporting: track recharge as a percentage of freight-out for management reporting, outside the statutory statement.
• Customer's books: the buyer treats the same delivery charge as freight-in, because it is part of the price of bringing its goods to its location.

Worked two-month example in dollars and rupees with half the stock unsold

One receipt and one month of sales show how freight-in waits on the balance sheet while freight-out lands at once. All figures are illustrative. The US entity elects ASC 606-10-25-18B; the Indian entity reports under Ind AS with GST on both transporter bills treated as recoverable input credit and excluded from cost.

For the US entity, cost of goods sold is $41,500, so gross profit is $17,900 on $61,200 of revenue, or 29.2%, with freight-out in cost of sales. If the entity kept a prior SG&A presentation, gross profit would read $19,700, or 32.2%, and operating profit would not change. In April, when the remaining 1,000 units sell, the other $1,500 of freight-in arrives in cost of goods sold.

The Indian statement shows the same economics differently. Purchases of stock-in-trade carry ₹66,40,000 including freight-in; changes in inventories show a reduction in expense of ₹33,20,000 for the unsold half; other expenses include freight outward of ₹1,44,000. Revenue from operations is ₹48,96,000. If the March outbound pattern held all year, freight outward of ₹17,28,000 would exceed the ₹10,00,000 floor and need separate disclosure.

Misclassifications that move margin, and the controls that catch them

Most freight-in and freight-out errors are routing errors in accounts payable, not judgement errors in accounting. A few fixed rules in the ERP catch the majority, and the remaining cases need a person who can read the commercial terms.

1. 31 Mar, 16:05, AP posting: carrier invoice FRT-77310 for $3,000 arrives for an inbound truckload on PO 4500128. The clerk sees the carrier also handles outbound lanes and posts the full amount to 6120 Freight Out through transaction FB60.
2. 31 Mar, 18:40, margin report: the flash gross margin falls from 31.1% to 26.4% for the product family, because cost of goods sold now includes freight for units still in stock.
3. 2 Apr, 10:15, close review: the cost accountant matches FRT-77310 to goods receipt GR-00981 for 2,000 units; the receipt has no freight absorbed, while the expense account shows an unexplained spike.
4. 2 Apr, 14:30, correction: a reversing entry moves $3,000 to inventory freight clearing; the landed cost run absorbs $1,500 into stock on hand and $1,500 into cost of goods sold for units already sold.
5. Control added: carrier invoices referencing a purchase order or inbound shipment number now default to the inventory freight clearing account and need approval to post elsewhere.

Checklist for setting freight-in and freight-out policy and accounts

A short written policy, a handful of accounts and two fixed ERP rules are enough for most entities. The policy should be agreed by the controller, the tax manager and the transport lead before the next quarter-end, because every later reclassification needs inventory history to unwind.

The policy gives you a stable margin line and a defensible inventory number; a coding matrix and landed cost run keep it working at volume. For more logistics finance topics, browse the logistics and supply chain hub. If you are choosing or rebuilding a freight audit, landed cost or close tool, you can share your requirements through our RFP page and we will respond with a scoped proposal.